RISK ASSESSMENT

Investment and consumption drive growth

Growth is expected to slow slightly in 2019 after solid expansion in both 2017 and 2018. Domestic demand remains the main driving force of the economy, household consumption increasing as a result of rising employment and wage growth (including significant wage increases in the public sector). The unemployment rate reached 3.8% in August 2018 – one of the lowest levels in the EU and well below its average of 6.7%. A further slight decrease of unemployment is expected, although a lack of available labour will reduce employment growth. Labour shortages have become a significant obstacle for companies, limiting their capacity to expand and driving wages higher. Despite the good situation on the labour market perceived by households, private consumption will accelerate at a slower rate, as the large public sector wage increase will fade out and a further increase is unlikely.

Economic growth has also benefited from rebounding investments, thanks notably to a surge in public projects. Facing high capacity utilisation, the private sector will likely be willing to conduct investments. Within this regard, the FDI inflow and EU structural funds are strong drivers of investment. On the other hand, SME investments are rather lacklustre, in large part due to labour shortages and the uncertainty of continuing solid demand.

Since 2017, companies in Hungary have benefited from a 9% corporate tax rate – the lowest in Europe. This measure mainly covers mid-sized Hungarian and foreign-owned companies with more than €2 million in revenue. Effective tax rates for large foreign multinationals in Hungary, especially German carmakers, had already been heavily reduced by subsidies and tax concessions. Hungary’s main exports are machinery products, vehicles and pharmaceuticals. Exports are supported by the weakening yet still relatively favourable perspectives of the country’s main trade partners, and the large share of the automotive industry in total exports is expected to strengthen thanks to further improvements in manufacturing capacity and new investments.

Budget deficit expected to drop

The general government deficit increased in 2018 as a result of tax cuts and a further increase of expenditure ahead of the April 2018 parliamentary elections. The reduction in the employers' social contribution rate mitigated the impact of growing wages for companies. In 2019, the budget will not be burdened by further expenditure growth and the deficit is expected to decrease. Its level is subject to the inflow of funds from the EU, which are predominantly used to co-finance infrastructure building projects. Spending on such investments could be reduced due to both delays in implementation and construction capacity constraints. Nevertheless, the final level could also go higher if the implementation is extremely efficient.

Hungary’s current account surplus reached 2.9% of GDP at the end of 2017. It has been used to increase both foreign currency reserves and investments abroad.

Fidesz remains in power

Prime Minister Viktor Orbán and his conservative Fidesz-Hungarian Civic Union (Fidesz) party were re-elected for a third four-year term in the April 2018 elections. After a nationalist anti-immigrant campaign in opposition to the EU on the dispersal of migrants, Fidesz obtained a landslide victory with two thirds of the seats in Parliament. The election was marked by an exceptionally high turnout: 68%, the highest since 1994. This absolute majority in Parliament allows the government to push through key legislation without needing cross-party agreement, and increases its control over state institutions. A number of sectorial taxes, which were criticized by the European Commission for mainly targeting foreign-owned operators, are likely to remain in place. These include an advertising tax on media, a retail tax, and a tax on energy sector entities if they do not invest in Hungary. In this context, relations with the European Commission will likely remain tense. Moreover, the European Parliament had already voted in September 2018 to initiate disciplinary action against Hungary over alleged breaches of the EU's core values, including the rule of law, freedom of the media and NGOs, and an insufficient fight again corruption. The suspension of Hungary’s voting rights would be the next punitive measure, but this is highly unlikely as it requires a unanimous decision from the European Council.

Last update : February 2019

Payment

Bills of exchange and cheques are not commonly used since their validity depends on compliance with several formal issuing requirements. Nevertheless, both forms of payment, when dishonoured or duly protested, allow creditors recourse to a summary procedure to obtain an injunction to pay.

The promissory note “in blanco” (üres átruházás, a blank promissory note) – which constitute an incomplete payment deed when issued – is not widely used in Hungary. This is because it qualifies as a negotiable document (securities), which may be transferred by endorsement plus transfer of possession of the document (subsequent to a blank endorsement, only delivery is needed).

Bank transfers are by far the most common payment method. After successive phases of privatisation and concentration, the main Hungarian banks are now connected to the SWIFT network, which provides low cost, flexible, and speedy processing of domestic and international payments. Furthermore, SEPA transfers are also a popular mean of payment because of the developing banking network.

Debt collection

Amicable phase

Where possible, it is advisable to avoid taking legal action locally due to the formalism of legal procedures and rather lengthy court proceedings: it takes one to two years to obtain a writ of execution. It is advisable to seek an amicable settlement based on a payment schedule drawn up by a public notary, who includes an enforcement clause that allows creditors, in case of default by the debtor, to proceed directly to the enforcement stage; subject to acknowledgement by the court of the payment agreement’s binding nature.

Since 2014, interest is due from the day after the payment date stipulated in the commercial contract and, unless otherwise agreed by the parties, the applicable rate will be the base rate of the issuer in force on the first day of the reference half-year period, plus 8%. From 2009, considering trade companies, a mediation to solve an out-of-court settlement must be held by the parties prior to commencing legal proceedings.

Injunction of payment and European Injunction of Payment

When in possession of a due and payable debt instrument (acknowledgement of debt, unpaid bill of exchange, dishonoured cheque, etc.), creditors may obtain an injunction to pay (fizetési meghagyás), using a pre-printed form. This more efficient and less expensive summary procedure now allows the notary – if he considers the petition justified – to grant an injunction, without hearing the defendant. The defendant is then instructed to pay both the principal and legal costs within fifteen days of the serving of the ruling (or within three days for an unpaid bill of exchange).

When the debtor has assets in other European Union (EU) member states, a European Payment Order procedure facilitating the recovery of undisputed debts may be triggered. This type of legal action has become mandatory for all claims between HUF 3 million and HUG 30 million (about €9.50-95.000) and is conducted digitally from beginning to end as of 2010. As a result, ordinary proceedings cannot be started if the claim is purely monetary and inferior to this €9.500 limit.

Since 2010, the injunction to pay is carried out by public notaries in order to reduce the workload of the courts. Although not mandatory, the presence of a lawyer is advisable for this type of procedure.

If the creditor has no Hungarian address, this procedure is not available.

Legal proceedings

Ordinary proceedings

In case of objection by the debtor, or if there is no Hungarian address, or if the claim is more than €95,000, the case is treated as a dispute and transferred to ordinary court proceedings. The parties will then be summoned to one or more hearings to plead their respective cases. Ordinary proceedings are partly in writing – with the parties or their attorneys filing submissions accompanied by all supporting case documents (original or certified copies) – and partly oral, with the litigants and their witnesses presenting their cases during the main hearing.

As of 2011, cases exceeding a value of HUF 400 million (approximately €1.6 million) must be swiftly handled by the courts via shortened legal processes. At any stage of such proceedings and where possible, the judge may attempt to achieve conciliation between the opponents.

It is relatively common practice to immediately issue a winding up petition against the debtor so as to prompt a speedier reaction or payment. This practice was sanctioned by the 2007 amendment to the Hungarian bankruptcy law, which authorised creditors to issue a winding up petition against a debtor only in they received no response nor payment from the debtor within 20 days of sending a formal notice. In practice, however, it is simple to request the liquidation of a debtor, and creditors regularly use this as a tool in the negotiation process.

Commercial disputes are heard either by the district courts (járásbíróság), set up in commercial chambers, or by legal tribunals (törvényszék), depending on the size of the claim. Payment claims up to HUF 30 million belong to district courts on first instance; above this rate, regional courts are the first instance for these cases. Insolvency procedures and enforcement belong to regional courts at first instance by default.

Enforcement of a court decision

When all appeal venues have been exhausted, a domestic judgment becomes enforceable. It the debtor fails to satisfy the judgment, the creditor can either request an enforcement order from the court, or for a specific performance (payment) through a bailiff, who will implement the different measures necessary to enforce compliance (from seizure of bank accounts to foreclosing real estate).

Regarding foreign decisions, those rendered in an EU country will benefit from special enforcement conditions such as the European Enforcement Order when the claim is undisputed. Nevertheless, for decisions rendered in a non-EU country, Hungarian law provides for a reciprocity principle: the issuing country must be part of a bilateral or multilateral agreement with Hungary.

Insolvency proceedings

Out-of-court proceedings

Even though Hungarian law does not provide formal out-of-court proceedings, private and informal negotiations are held between creditors and debtors in order to avoid judicial insolvency proceedings. This constitutes a practical approach in order to avoid liquidation. If an agreement is reached, they can request the suspension of a judicial proceeding until the agreement is respected.

Restructuring the debt

Under Hungarian law, restructuring is not formally regulated, even though the Hungarian Bankruptcy Act regulates all insolvency processes, including specific deadlines, legal requirements, and rights and obligations for participants. Instead, both bankruptcy and liquidation proceedings offer a debtor company a chance of survival by restructuring its debt in a composition agreement in a ninety-day stay. It is extremely rare to conclude a liquidation process with a surviving company, as the aim of the proceedings is by nature not one of restructuring.

From this point onwards, the acts of the debtor are overseen by an administrator. The reorganization agreement must be validated by a majority of creditors and the court must also approve the plan. If a compromise is not reached, the court will terminate the proceedings and declare the debtor insolvent.

Liquidation

Proceedings may be initiated upon demand of either the debtor or the creditor, and a liquidator is subsequently appointed. Creditors must lodge their claim and pay the fees within 40 days of the commencement of the proceedings in order to be listed in the table of creditors and consequently receive a part of the proceeds. The liquidator will then assess the debtor’s economic situation together with the claims, and then provide the court with recommendations on how the assets should be distributed. All insolvency procedures are validated by court, but there are very few checks in place that prevent creditors from liquidating their companies, which makes it a very easy and common practice for failed businesses, hence the relatively high number of insolvencies in Hungary.